Does federal tax credit for renters exist?

Why tenant's quest for savings raises suspicion

Robert Griswold Contributor

Feb 15, 2007

Question: My question relates to a tenant who said he must send me a federal 1099 tax form with the total amount of rent he paid to me in the prior year for renting my house. He claims he has to in order to collect a federal tax credit. I’ve never heard of such a thing. I do have a strained relationship with this particular tenant and think he may be just trying to cause me problems. Can you tell me where I can find the tax ruling on this? I am a novice at renting my house out so pardon me if I sound very ignorant, as I may very well be.

James McKinley, an attorney for landlords, replies:

Check with your tax advisor but I believe it would be totally inappropriate for one of your tenants to give you a federal 1099 form for rent that he paid to you. A Form 1099-MISC is given to self-employed workers or independent contractors as a record to the IRS of payment or compensation for services. As a landlord, you generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property; this does not include security deposits. There is no federal renter’s tax credit, and no need for a tenant to give you a 1099. When a tenant states that he wants to give a landlord a 1099, it raises a red flag in my mind. Usually the tenant is trying to harass or intimidate the landlord. There are some states that do offer a limited renter’s tax credit but that is a personal income tax credit for tenants that can be used only to offset their own tax liability if they qualify and has nothing to do with your income or tax situation. You can find most answers to your tax questions at the IRS Web site: www.irs.gov.

Question: I have read your column for several years and recently you indicated that the landlord could ask the tenant for a larger security deposit as long as he/she gave the tenant proper notice and did not exceed any maximum limits as outlined in state or local law. But my question is realistically what happens when the tenant is unwilling to pay the increased security deposit? What steps can the landlord take to make this effective?

Property manager Griswold replies:

If the tenant does not pay the increased deposit as required by the written notice then the landlord has the option of considering the tenant in breach of the lease or rental agreement. While you would want to avoid such a scenario, the landlord can serve the tenant with a legal Notice to Cure or Quit for the failure to pay the additional security deposit. It can be a good idea for landlords to increase the security deposit even for an established tenant especially if the tenant has occupied the property for a long time and the security deposit is well below what is currently expected in the market. Tenants may have lived in a rental property for so long that the security deposit held by the landlord once was equal or greater than a full month’s rent but now is less than 50 percent of a month’s rent. Of course, such a long-term tenancy with a low security deposit is not a landlord’s greatest challenge and is better than having tenants leave every year. However, the value of the rental unit and the cost of making repairs to the rental unit have certainly increased as well over time. A landlord could find that the nominal security deposit on hand does not cover the current costs of repairing damages to the rental unit that are not allowable as normal wear and tear.

For example, a long-term tenant might have had the carpet replaced recently but the landlord discovers that the tenant destroyed it upon move-out and it now needs to be replaced at the tenant’s expense. If the security deposit is insufficient, the landlord would have to take legal action against the tenant. This is not a favorable move under any circumstances but even less so if the tenant testifies that he/she lived at the property for many years. So keeping the security deposit of even long-term tenants at a level comparable to what new tenants are being assessed is a good property management strategy. However, I always suggest that when the landlord increases the security deposit for an existing tenant that the tenant be allowed to pay it over time so that it is more acceptable and doesn’t create as much of a hardship.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and co-author of “Real Estate Investing for Dummies,” and San Diego attorneys Steven R. Kellman, director of the Tenant’s Legal Center, and James McKinley, principal in a law firm representing landlords.